Bowles Sporting Inc. is prepared to report the following 2011 income statement (shown in thousands of dollars).

Sales $15,2000

Operating cost including depreciation 11,9000

EBIT $3,300

Interest 300

EBT $3,000

Taxes (40%) 1,200

Net income $1,800

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 500,000 shares of common stock outstanding, and its stock trades at $48 per share.

a. The company had a 40% dividend payout ratio in 2010. If Bowles wants to maintain this payout ratio in 2011, what will be it per-share dividend in 2011?

b. If the company maintains this 40% payout ratio, what will be the current dividend yield on the company’s stock?

c. The company reported net income of $1.5 million in 2010. Assume that the number of shares outstanding has remained constant. What was the company’s per-share dividend in 2010?

d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2011 that is paid in 2010. If it chooses this policy, what will be the company’s dividend payout ratio in 2011?

e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend? Explain.

Solution Description

prepared to report the following 2011 income statement (shown in thousands of dollars).